The Gold-Silver Ratio Explained Like Never Before

While there have been countless articles written about the Gold-Silver Ratio, they did not include the information that will be provided in this article.  Most of the information or analysis on the gold-silver ratio has been based on its “price ratio” and little else.

Unfortunately, price ratios are only a small part of the overall picture.  To get a better understanding of the gold-silver ratio, we have to include data that has been overlooked by the industry.  For example, it is important to understand how the metals are produced, as it is a leading indicator of the current price mechanism.

I decided to use statistics from the United States, as it is a good indicator of what is taking place in the rest of the world.  Furthermore, the USGS – United States Geological Survey provides excellent data on the gold and silver industry.  In addition, I have included statistics for copper, as the king base metal adds more evidence to the price ratios of the metals.

According to the USGS, this was the breakdown of U.S. copper, silver and gold production in 2015:

In 2015, the United States produced 1,125,000 metric tons (mt) of copper, 1,100 mt of silver and 200 mt of gold.  Thus, the U.S. produced 1,022 times more copper than silver and 5.5 times more silver than gold.  Globally, here are the production ratios for 2015:

Global Copper, Silver & Gold Production Ratios For 2015:

Copper = 18.7 million tons (685 times silver)

Silver = 27,300 metric tons (9 times gold)

Gold = 3,000 metric tons

These figures came from the USGS and are a bit different from the data GFMS puts out in their Gold and Silver Surveys.  However, they are a good representation of the different metal’s production ratios.  As we can see, the world produces a heck of a lot more copper than silver, and a lot more silver than gold.  The notion that the price of gold and silver should be based upon their production ratio of 9 to 1, is not currently true as the price ratio is 69 to 1… nearly eight times higher.

Now, one important factor in determining the current gold-silver ratio (and copper) is how it is produced.  Again, many articles continue to state that the gold-silver price ratio should be closer to their annual production ratio.  However, this does not include a very important factor… the production ratio per worker:

I converted the metric ton figures in the first chart to ounces or troy ounces and divided them by the total number of workers for each metal.  Each copper worker produced 3,173,000 ounces of copper compared to 47,100 oz for silver and 585 oz for gold.  Thus, each worker produced 67 times more copper than silver and 80 times more silver than gold.

Here are the worker figures for the U.S. copper, silver & gold industry in 2015:

Copper = 11,400 workers

Gold = 11,000 workers

Silver = 750 workers

While it is true that not all gold and silver production comes from primary gold and silver mines, this still provides us a good ratio of the amount of metal produced by each worker.

Now, if we look at the price ratios of each metal in 2015, we can spot an interesting correlation:

The average spot price of gold in 2015 was $1,166 compared to $15.68 for silver and $0.21 an ounce for copper.  Thus, silver was 75 times more expensive than copper and gold was 74 times more expensive than silver.  If we compare these price ratios to the production per worker ratios, there is an interesting parallel.

Gold, Silver & Copper Ratios 2015:

Gold Price 74 times higher than silver versus silver production 80 times higher

Silver Price 75 times higher than copper versus copper production 67 times higher

While these ratios don’t match up exactly, we can plainly see that the amount of metal produced by each worker corresponds to their price ratios.  Furthermore, I have stated that gold and silver are being priced based on their cost of production, rather their production ratio extracted from the ground.

In 2000, the cost of gold production at the top two miners (Barrick & Newmont) was $243 an ounce versus the average gold spot price of $279.  In comparison, the top two gold miners cost of production increased to $1,116 an ounce in 2015, versus the average spot price of $1,160.  Thus, the average gold price in 2015 was only 3.8% higher than Barrick and Newmont’s average cost of production.

So, the market is currently valuing gold, silver and copper based on their cost of production, not the ratio of the metal being extracted from the earth.  While many analysts continue to claim that silver is undervalued due to its 9 to 1 production ratio to gold, they do not consider the way these metals are being extracted compared to historical times.

For most of history, gold and silver were extracted from the earth using human and animal labor.  However, since the late 1800’s, coal and then oil became the leading energy sources used for extracting metals such as gold, silver and copper.  The chart below shows the amount of fuel consumed by Barrick & Newmont versus Pan American Silver to produce an ounce of gold and silver:

The first chart shows Barrick & Newmont consumed 32 gallons of fuel to produce an ounce of gold versus 0.80 gallon of fuel for Pan American’s total silver production.  However, this included some silver-gold open-pit mines.  If we consider just Pan American Silver’s primary silver production, it only consumed 0.20 gallon of fuel to produce an ounce of silver.  If we average the two, we end up with approximately 0.50 gallons to produce an ounce of silver versus 32 gallons for an ounce of gold produced by Barrick & Newmont.  This is about a 64 to 1 ratio of fuel consumption per ounce of gold versus silver produced.

Yes, these are just approximations, but it still provides us more data on the valuation of the gold and silver price.  We must remember, there are a lot of energy slaves continued in a barrel of oil.  I mentioned this in a previous article, but it is relevant again.

The United States consumed about 19 million barrels a day of oil in 2015.  There approximately 23,000 man hours worth of work in a barrel of oil.  Thus, daily U.S. oil consumption in 2015 equaled 54.6 billion people working an eight-hour day.  That’s a lot of energy slaves.

It has been due to the introduction of a tremendous amount of oil energy slaves that has distorted historic gold-silver ratio of 15/1 of the past.  When gold and silver were extracted via human and animal labor, only the highest ore grades and veins were extracted for the most part.  Which means, the price of gold and silver were valued based upon their ratio extracted from the ground.

When oil came on the scene, it became feasible to mine lower and lower quality ores that were impossible or uneconomic to do by human or animal labor.  Again, this destroyed the historic 15/1 gold and silver ratio.

CRITICAL FACTOR:  Gold & Silver Are Not Just Mere Commodities

The market today has totally dismissed gold and silver as money.  Instead they value them as mere commodities, based on the cost of production and some supply and demand forces.  Years ago, I had to laugh when I read a few articles stating that the gold price was weak due to falling demand in the dental industry…. LOL.

While gold and silver are consumed in industry (more silver), they still behave as STORES OF WEALTH or MONEY.  Even though the market is currently valuing gold and silver as mere commodities, they will once again become high quality stores of wealth.

This is all due to the coming Thermodynamic Oil Collapse which is now being shown by the financial results in the Major Oil Industry.  The top three U.S. oil companies used to be extremely profitable.. not any more.  The combined Free Cash Flow from ExxonMobil, Chevron and ConocoPhillips has fallen from $46.3 billion in 2011 to a negative $7.3 billion in 2016.  However, their free cash flow would have been much worse if they didn’t cut $20 billion from their capital expenditures last year:

The U.S. and global oil industries are in big trouble.  Without continued cheap and abundant energy supplies, the global economy disintegrates.  With the disintegration of the global economy, comes with it, the collapse in value of most STOCKS, BONDS & REAL ESTATE.  Unfortunately, these are the assets that 99% of investors in the world have parked their money.

The current gold-silver ratio is being valued based on their cost of production.  The production of metal per worker is also a large factor in determining the current gold, silver and copper price.  However, copper is predominately used today as an industrial metal, while a large percentage of gold and silver mine supply continues to be acquired by individuals as an INVESTMENT.

To understand when gold and silver will be revalued as MONEY or STORES OF VALUE, we need to pay attention to the energy market.  I will be publishing more articles and reports on the continued disintegration of the U.S. and global oil industry in the future.

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16 Comments on "The Gold-Silver Ratio Explained Like Never Before"

  1. Hi Steve,

    Very good analysis only you would need to include the Pelgrim Society and where it stands for. Namely
    total remove silver and gold as any means of money. Btw Donald Trump is as well member of this nice club! The manipulation in the gold and silver markets are essentially to keep the fiat paper system going.

    On a list of probable United States Pilgrims Society members as of 2011 we would anticipate encountering names such as Timothy Mellon; David Rockefeller Jr.; Timothy Geithner; Benjamin Bernanke; George Soros; Warren Buffet; Bill Gates; Ted Turner; Robert Kelly of Bank of New York Mellon; Gene McQuade of Citigroup; Lloyd Blankfein, William W. George, James A. Johnson and John H. Bryan of Goldman Sachs; Jamie Dimon, James Crown and Lee Raymond of JPMorganChase; John Stumpf of Wells Fargo; Marcus Agius, Sir Richard Broadbent and Sir John Sunderland of Barclays; Donald F. Donahue, Depository Trust New York; William Dudley, Federal Reserve Bank of New York; Thomas J. Healey of the Rockefeller Foundation; and others the reader can look up including Philip Anschutz; John D. Arnold; Louis M. Bacon; Robert Bass; Michael Bloomberg; David Bonderman; Eli Broad; Anne Cox Chambers; Barry Diller; Larry Ellison; James Goodnight; William H. Gross; Amos Hostetter Jr.; Carl Icahn; Edward Johnson III; Rupert Johnson Jr.; Paul Tudor Jones; George B. Kaiser; Peter R. Kellogg; Randal J. Kirk; Thomas H. Lee; Donald B. Marron; Forrest Mars Jr.; John Franklyn Mars; Craig McCaw; Gordon Moore; Donald Newhouse; Samuel Newhouse Jr.; Hank Paulson; John Paulson; Thomas Pritzker; Richard Rainwater; Julian Robertson; Sir Simon Robertson and Sir Brian Williamson of HSBC; Richard Mellon Scaife; Harold Simmons; Donald Trump; Mortimer B. Zuckerman. There is no assurance that any of these names would be on a current list; however, the odds of many of them being there are very high. Apologies to the rest, but we are forced to deal in speculation. There would be an estimated 700 names. British diamond dealer Laurence Graff may also be there. Also of note if available would be the 50 to 70 names on The Pilgrims Waiting List. Compliance with Society objectives is requisite to membership! Of more importance than names we can confirm from times past as members, and those currently who can be identified, are current lists of these global racketeers and warmongers. Active members pose the risk to world peace and prosperity.

      • The claim that the Price Ratio depends on how many workers are mining the metals is a Farce. 72% of the demand of Silver in the US is imported from foreign countries. Did you take into account of the supply from those turning in silver coins and jewelry that are sold to pawn shops for recycling? 50% of the demand in the US for Silver goes to Industry. Gold is far less. Solar panels require a lot of silver. The Price Ratio when looking at a 20 year History chart, navigates between the normal range of 80:1 to about 47:1. And after about 9 months to a year after the Price ration is at 80:1 it drops to 47 to 1. This has done this consistently 3 times in the last 20 years like clock work. And we are now on the down cycle from 80 to 1 to now 69 to 1 and it will fall back down to 47 to 1. This is more reliable of a road map than trying to guestimate the number of mining workers. So who ever wrote this article is out of their mind for any legitimacy. Go look at a 20 year history chart for Silver to Gold Price ratio. And what I just said here is way more legit and that 20 year chart verifies what I am saying.

    • Not fiat, but capitalism system whose fiat is a logic and determinist step…

  2. Eroei and ECoE (energy cost of energy) indicate bad news for the near future. This is from dr. Tim Morgan’s website, the author of ‘The Perfect Storm’.

    Eroei goes down, costs go up. Thermodynamics again.

  3. “While gold and silver are consumed in industry (more silver), they still behave as STORES OF WEALTH or MONEY.”

    g/s store nothing. they’re just money – when they’re being used as money. at this point they’re not being used as money, so at this point they’re not money either.

  4. “Namely total remove silver and gold as any means of money.”

    would these be the guys putting up those billboards all over the place saying, “private collector wants to buy your gold! call 1-800-something”?

  5. Steve,

    Ok, I get your point, lots of low grade silver ore mined because of the introduction of petro energy, changed the ratio. That’s the past, what about the future?

    If we reach peak oil then price may be set by quality available with very little new production. There may well be less silver available than gold because it has been consumed.

    I’m interested in the future. You have presented reasonable facts for the present ratio, but where are we going?

    A Co making cell phones or computers may need silver, but because of the small amount of silver in each unit produced, they may pay any price for a chunk of silver.

    By wt, how much silver in a $5,000 computer (inflation adj) or a $1,500 cell phone? I’m guessing not much because today very little salvage value in either.

    They may pay $100,000 for 10 oz bar if it permits them to continue building product?

    But hey, if no one has gas to get to work in an unairconditioned high rise, who needs computer or cell phone.

  6. Excellent Steve, thanks.

  7. How about HHO ? It works!

  8. How do you know how many workers are involved in getting silver out of the ground, ditto gold? Have you contacted every silver and gold miner to ask for employment numbers? Of course not. As well you know, most silver production is a by-product of copper and zinc mining, therefore large amounts of silver are coming out of zinc and copper mines! So in fact one could argue that it takes less workers to get silver out of the ground than it does gold.

    • DisappearingCulture | February 17, 2017 at 7:14 am |

      “How do you know how many workers are involved in getting silver out of the ground, ditto gold?”

      It’s called using the best available data.

      And he knows far better than most that “most silver production is a by-product of copper and zinc mining”, and takes that fact into his analysis.

  9. Excellent work Steve!

    I was just playing with some numbers and came to some interesting observation. Based on your numbers and the average price in 2015, the market cap of the yearly mine production was roughly

    copper 90 billion
    silver 14 billion
    gold 112 billion
    oil 1450 billion

    Which put the market cap of the physical metals silver/gold ratio at just above 8 / 1 – coincidence?
    Obviously this is not price per ounce rations, but still I found it somewhat intriguing.

  10. According to the exponential growth of cell phones globally the market is set to explode to an addition 2 billion cell phones.
    This is the purpose of Alphabet’s (Google) Loon global project.
    As of today it takes 1 ounce of silver to construct 4 cell phones; That is an additional 500,000 ounces to be consumed, besides all the other support electronics routers, switches, transmitters, receivers, etc.
    If autonomous automobiles grow as projected then there is going to be a REAL shortage of silver!
    Because the plan is to switch from Lithium to silver zinc batteries !
    It appears that silver is an investment that is literally a buy and hold strategy that really makes sense!

  11. Earnest Wills | May 23, 2017 at 4:55 pm |

    Is there any explanation for why it costs so much more fuel to produce gold than silver. Is it because silver costs less to refine than gold, or is there some other reason I’m missing. BTW, your articles are freaking awesome!

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